Nvidia remains ahead of the pack

This week's quarterly report underscores that the 3D graphics champ keeps winning the game--and that there's hardly anyone left to play with.

It takes a titan to tame an industry, and Nvidia has done it in 3D graphics.

Processor makers, memory chip manufacturers, network chip specialists and digital signal processor sellers have reeled in the face of the U.S. tech recession, but Nvidia apparently hasn't flinched. This week's quarterly report underscores the fact that the 3D graphics champ keeps winning the game--and that there's hardly anyone left to play with.

Nvidia reported better-than-expected earnings for the first quarter of fiscal 2002, but the more important news came during the conference call when a company executive reiterated the same forecast made in February. Chief Financial Officer Christine Hoberg told analysts to stick with First Call estimates calling for 50 percent revenue growth in fiscal 2002 and a 40 percent sales improvement in 2003.

"What an execution machine," Prudential Securities analyst Hans Mosesmann wrote in a research after earnings came out.

Any technology company able to stay with its original forecasts gets accolades these days. That's particularly significant coming from a chip company, especially one that until now has been entirely dependent on PCs, a mature market.

"Looking at the semiconductor space, there aren't too many other companies who can point to 50 percent growth in revenues this year and 40 percent next year," said Eric Ross, analyst with Thomas Weisel Partners. "I can't think of one besides Nvidia."

Wall Street has rewarded believers in the company. Since going public in early 1999, Nvidia's market value has risen almost 10-fold. On Thursday, Nvidia announced it will be added to the Nasdaq-100 Index as of May 31. The index represents the largest and most active non-financial stocks listed on Nasdaq based on market capitalization.

Yet the company has never shaken its doubters. First Call, Zack's Investment Research and Nvidia's own Web site list only five Nvidia analysts--a quarter of the coterie that follows, for example, network chip specialist PMC-Sierra, even though that company likely will report annual revenue that's less than half of Nvidia's.

As recently as early April, more than one-fifth of Nvidia's outstanding shares were being shorted, according to Market Guide. Short-sellers bet a stock price will fall; they borrow shares to sell them immediately and hope to cover the loan later by buying replacement stock at a lower cost.

"The shorts have gotten painfully squeezed on Nvidia," Ross said.

Kings of the hill
Nvidia stock has more than tripled since one of the company's most notable rivals, 3dfx Interactive, surrendered in December and agreed to sell its assets to Nvidia. 3dfx's failure stands as an example of the industry trend that has so many people wondering about Nvidia.

"If you look at it historically, graphics companies have blown up every couple of quarters," Ross said. "They all were king of the hill for about 25 minutes, and then they got knocked off."

Wall Street prefers less volatile industries, but the graphics industry is becoming a reasonably stable market, largely because of Nvidia.

Mercury Research analyst Mike Feibus points out that Nvidia went public just as 3D graphics moved from a high-end niche into broader products used in virtually all desktop PCs. Nvidia recognized that trend and introduced new chip designs every six months, a breathtaking pace for an industry used to seeing new products every 18 months.

Nvidia actually fires out chip architecture at the traditional pace, Feibus noted. But while other graphics chipset companies utilized one-size-fits-all approaches, Nvidia uses the same architecture to design chips for different segments.

The GeForce2 line, to use one example, includes MX for cheapskates, GTS for the midrange and Ultra at the high end. And there are further subdivisions for these products.
Nvidia's only publicly traded competitor left, ATI Technologies, lately has started doing the same thing with its Radeon chips, but Nvidia has already built a clear lead.

Competitors few, far between
Nvidia's share of the stand-alone graphics processor market has increased from 37 percent a year ago to 53 percent, according to Mercury Research numbers cited on this week's Nvidia conference call. In the latest generation of graphics processors, it claims 83 percent market share.

Nvidia could be dubbed the Intel of 3D graphics. Actually, Nvidia is in a better position because there's no equivalent to Advanced Micro Devices in 3D graphics. "There really isn't a company looking over Nvidia's shoulder," Feibus said.

That's accurate for 3D graphics in Windows desktops. The company's new horizons include notebooks, workstations, and desktop chipsets that combine graphics with core functions. Nvidia just started selling cards for Macs. And the company will get at least some boost this fall when Microsoft starts selling the Xbox game console, which will house an Nvidia chipset.

The only real question about Nvidia may be the stock price. One can reasonably wonder whether a stock that has gained more than 200 percent in the last five months can rise much higher.

But stocks can be measured in a relative sense. At Thursday's price in the $94 range, Nvidia was trading at nearly 55 times estimated earnings for the current fiscal year. Bellwether Intel, which will be lucky to grow half as fast as Nvidia over the next two years, is valued at about 52 times projected earnings.